Diamond Dancer

He's simultaneously observing someone else dance and watching a metamorphis.

The bass line and stattaco violins suggest disco - often considered a self-indulgent music - and the lyrics about "dancing all by herself and not minding" also reinforce that. Is the act of turning yourself into a diamond and giving the world your light suggest something that Callahan is going through. His name change from (smog) to Bill Callahan suggest a change from conceptual, indirect art to a more direct singer-songwriter model.

To me this song is about Smog becoming Bill Callahan and the transition from the obscure/oblique monkier of the band name (for a band which never really existed, because all it ever really was is Bill). So he's saying I was doing this thing all by myself, and being as open and as clear as I could hope to be, but still hiding behind the 'Smog' name. At the end he says "it's time I have the world my light" meaning, it's time to just be myself and take responsibility for the things he says - in counterpoint to Vessel in Vain's "I can't be held responsibile...".

Bliss of dancing. That is all.

It almost sounds like it could be about a stripper. One that isn't experienced in sex itself, and dancing how she imagined it.

Her skin was sky blue Under the lights

^^the world. the earths skin (sky) is sky blue, under the lights (sun).